Lialibity

LIABILITY can be further divided into 2 parts:

  1) NON-CURRENT LIABILITY : Liability that must be paid off to debtors in more than one year .
  2) CURRENT LIABILITY : Liability that must be paid off to debtors within one year.

Components of Non-Current Liability:
  1) LONG TERM NOTE PAYABLES : Money owed by company to creditors with formal agreement. Examples are long term borrowing, bond issued by company.
  2) DEFErRED TAX LIABILITY : Tax that had been paid less in the past.

 
Components of Current Liability:
  1) TRADE PAYABLES :  Money owed by company to suppliers
  2)  NOTE PAYABLES : Money owed by company to creditors with formal agreement. Examples are short term borrowing.
  3) ACCRUED EXPENSES : Expenses that had been used but haven't  pay.
  4) UNEARNED REVENUE : Payments received but company has not provided good or services yet.
  5) DEFERRED TAX LIABILITY : Tax that had been paid less in the past.

*Further Information for

“Equity”

Asset

ASSET can be further divided into 2 parts:

    1. NON-CURRENT ASSET : Asset that can not be turned into money within one year
    2. CURRENT ASSET : Asset that can be turned into money within one year

Component of Non-Current Assets:

    1. PROPERTY, PLANT, AND EQUIPMENT(PPE) : Tangible asset that can be used to generate profit and last more than one years. Examples are building, equipment, machinery, furniture and land.  
    2. CONSTRUCTION IN PROGRESS : Buildings that are in the process of constructing.
    3. INVESTMENT PROPERTY : Property that are used to receive rental income or value appreciation and not used for production or administration purpose.
    4. INTANGIBLE ASSET : Asset without physical appearance. Examples are patent, license, trademarks.
    5. GOODWILL : When company acquired another firm, the different between buy price and the excess value of that firm(asset-liability) is goodwill.
    6. FINANCIAL ASSET :  Financial security that will not be sold within one year. Examples are bonds hold for maturity.
    7. DEFERRED TAX ASSET : Tax that had been paid more in the past or tax incentive that can be used  for tax reduction in futures.

Components of Current Assets:

    1. INVENTORY : Goods that will eventually be sold to customers. For  example: raw materials , work-in-progress and finished goods.
    2. TRADE AND OTHER RECEIVABLES : Money owed by customers to company.
    3. PREPAID EXPENSE : Expense that had been paid in advance but not been used.
    4. MARKETABLE SECURITY :  Financial security that can be changed into cash within one year. Examples are stocks, bonds, bank notes, treasury bills.
    5. CASH AND CASH EQUIVALENTS : Consists of cash and deposits in banks.

*Further Info

“Liability”

Equity

Components of Equity
  1) SHARE CAPITAL : Money collected by issuing shares through IPO or right issues. 
  2) SHARE PREMIUM : Excess amount received by a firm over the par value of its shares during IPO.
  3) TREASURY SHARES : Company repurchases its own shares.
  4) RETAINED EARNINGS : Cumulative earnings of company from previous years.
  5) OTHER RESERVES : Reserves that had been set aside for other purposes.
  6) NON-CONTROLLING INTEREST :  Equity interest owed by minority shareholders in subsidiaries firms which are not wholly owned by company.

*Further Information for

“Asset”

An Introduction to Financial Reports

A financial report is a formal record of a company by using financial data. It is important and accurate because it consists only figures which is more objective than the announcement or statement consists of words.

There are two types of financial report: 

  1) Interim Financial Report : Normally published quarterly or semiannual. Usually unaudited and prepared in condensed form.

  2) Annual Financial Report : Financial Report prepared for a period of one year. Required to be audited by an auditor from outside firms.

A financial report can be divided into two parts: 

A) 4 main accounts are: 
1) Balance sheets
2) Income statements
3) Statement of change of equity
4) Statement of cash flows

B) Financial notes present more detailed disclosures about the above 4 main accounts.

Income Statement

Income Statement is used to show business done by a company in one year.

One formula can conclude the whole income statement.

Revenue - Expense = Profit

For example, you own an company which selling apple. After one year,  1000 apples are sold with 2 dollar each.(Revenue= 1000 x2=2000) Suppliers provide apples with 1 dollar each. Salary for worker is 100 dollar per year and electricity cost per year is 50 dollar. (Expense= 1000 x1+100+50=1150) Your company earns a profit of 850 dollar. (Profit = 2000-1150 =850) 

Income Statement Template 

Components of Income Statement:

  1) REVENUE : Price x Quantity
  2) COST OF GOOD SOLD : Direct costs involved in producing  products. Examples are materials, direct labour, factory overhead such as electricity bill and depreciation of machines.
  3) GROSS PROFIT : REVENUE - COST OF GOOD SOLD
  4) OTHER OPERATING PROFIT : Other incomes from direct sales of products such as sales of electricity and rental fees from unused spaces from building used for operation.
  5) OPERATING EXPENSE :  Indirect expense incurred other than direct cost such as general & administrative expenses, sales & distribution expenses, promotion expenses, research expenses.
  6) OPERATING PROFIT :  GROSS PROFIT + OTHER OPERATING   PROFIT - OPERATING EXPENSE
  7) FINANCIAL PROFIT (also called Non-Operating Profit) : Profit that are generated from non-operating activities. Examples are interest received, gain from selling securities.
  8) FINANCIAL EXPENSE (also called Non-Operating Expense) : Expense that are not included in operating activities. Examples are interest paid, lost from selling securities.
  9) PROFIT BEFORE TAX (PBT) : OPERATING PROFIT + FINANCIAL PROFIT - FINANCIAL EXPENSE
  10) INCOME TAX : Tax paid to government based on profit before tax (or more accurate taxable income)
  11) NET PROFIT FROM CONTINUING ACTIVITIES : PROFIT BEFORE TAX - INCOME TAX
  12) NET PROFIT FROM DISCONTINUED ACTIVITIES : Gain/ Loss from liquidating one of the sectors of the company
  13) OTHER COMPREHENSIVE INCOMES : Mainly consist of three factors that not added into the profit. Examples are Gain/ Loss from foreign currency, gain/loss from hedging, unrealised gain of available-for-sales securities.
  14) TOTAL COMPREHENSIVE INCOMES : NET PROFIT + OTHER COMPREHENSIVE INCOMES

Other Info: 

"Balance Sheet"

"Change of Equity Statement"

"Cash Flow Statement"

Cash Flow Statement

Cash flow Statement records only the cash that had been received or paid.  Compared to other financial statements, Cash Flow Statement can be considered vary accurate because every record requires receipt as proof and involves little assumption.

Cash flow Statement basically can be divided into three categories based on the classification of the function of cash：
  1) NET CASH FLOW FROM OPERATING ACTIVITIES
  2) NET CASH FLOW FROM INVESTING ACTIVITIES 
  3) NET CASH FLOW FROM FINANCING ACTIVITIES

Cash Flow Statement Template

Components of Cash Flow Statement :

   1) ADJUSTMENT FOR NON-OPERATING INCOMES/EXPENSES : Remove incomes or expenses that are not included in operating activities. Examples are financial incomes, financial costs. 
  2) ADJUSTMENT FOR NON-CASH ITEMS : Remove items that are included in calculating profit but not involve cash payment. Examples are depreciation, amortisation and impairment.
  3) ADJUSTMENT FOR WORKING CAPITALS: Adjust profit with working capitals because the sales do not involve cash transfer. Examples are receivables, payables and inventories.
  4) NET CASH FLOW FROM OPERATING ACTIVITIES : Cash flow earned by company main business.
  5) NET CASH FLOW FROM INVESTING ACTIVITIES : Cash flow associated with acquiring and disposing non-current assets. Examples are property, equipment and security.
  6) NET CASH FLOW FROM FINANCING ACTIVITIES: Cash flow related to obtain and repay capital and debt. Examples are interest paid and borrowing.
  7) NET INCREASE IN CASH AND CASH EQUIVALENTS :  Net cash flow received during this year.
  8) CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR : Cash owned by company in last year financial report.
  9) CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR : Total cash owned by company now. (or more accurate at the moment of preparing this financial report).

Further Explanation about Cash Flow Statement

Cash Flow Statement is usually presented in indirect form. Indirect form means it is not direct form. The main reason indirect form is used is to show to shareholders how to link the cash flow that received with the income statement. It starts from PROFIT BEFORE TAX (PBT) to calculate the OPERATING CASH FLOW (OCF) or NET CASH FLOW FROM OPERATING ACTIVITIES.

If we compared PBT with OCF,

  1) We can find that many item that is included in PBT which does not belong to OCF. The first one is NON-OPERATING INCOMES/EXPENSES. PBT includes NON-OPERATING INCOMES/EXPENSES such as interest received / interest paid that  belong to NET CASH FLOW FROM INVESTING ACTIVITIES and NET CASH FLOW FROM FINANCING ACTIVITIES. This item needs to be deducted from PBT to calculate OCF.

  2) We also can find that NON-CASH ITEMS are included in PBT, such as DEPRECIATION. When a company buys a machine, cash already been paid. So no cash involved afterwards. OCF only records items involved in cash transfer only. Therefore, this item need to be deducted.

  3) PBT only concerns how much products are sold in one year, but OCF concerns about how much cash that received in one year.Therefore, PBT need ADJUSTMENT FOR WORKING CAPITALS to calculate OCF.

Firstly, when a product is sold for credit, which means RECEIVABLES in BALANCE SHEET will increase. This will cause OCF becoming less than PBT. Therefore the increases in RECEIVABLES have to be deducted from PBT to get OCF.

Secondly, when a company buy materials from supplier in credit, the expense will be included in PBT and  recorded in COST OF GOOD SOLD. This will cause PAYABLES in BALANCE SHEET to increase . However no cash is paid out. So it will cause PBT to be less than OCF. So the increase in PAYABLES should be added into PBT to calculate OCF.

Thirdly, when a company use material in inventory to produce product to sell, the expense will be included in PBT and  recorded in COST OF GOOD SOLD. This will cause INVENTORY in BALANCE SHEET to decrease. However no cash is paid out. So it will cause PBT to be less than OCF. So the decrease in INVENTORY should be added into PBT to calculate OCF.

Other Info: 

"Balance Sheet"

"Income Statement"

"Change of Equity Statement"

Change of Equity Statement

Change of Equity Statement only focuses on the equity part in balance sheet but with detailed explanations about what happen to the equity in the whole year.

Change of Equity Statement basically consists of two part:
  1) NON-DISTRIBUTABLE : Profit that cannot be distributed.
  2) DISTRIBUTABLE : Profit that can be distributed to shareholders.   

Change of Equity Statements Template

Components of Change Of Equity Statement ：

  1) SHARE CAPITAL : Money collected by issuing shares through IPO or right issues. 
  2) SHARE PREMIUM : Excess amount received by a firm over the par value of its shares during IPO.
  3) TREASURY SHARE: Company repurchases its own shares.
  4) RESERVES : Money reserved by company either mandated by regulation or for special purposes. Change in RESERVES with be recorded  in OTHER COMPREHENSIVE INCOME in Income Statement. Examples are Capital Reserves, Currency Translation Reserves, Cash Flow Hedge Reserves & Fair Value Reserves for Security.
  5) RETAINED EARNINGS : Cumulative earnings of company from previous years and can be distributed to shareholders through dividend and bonus issue.
  6) EQUITY ATTRIBUTE TO SHAREHOLDERS : Net equity of company owned by company shareholders. 
  7) MINORITY INTEREST (NON-CONTROLLING INTEREST) :  Equity interest owed by minority shareholders in subsidiaries firms which are not wholly owned by company.
  8) TOTAL EQUITY : EQUITY ATTRIBUTE TO SHAREHOLDERS + MINORITI INTEREST

Other Info: 

"Balance Sheet"

"Income Statement"

"Cash Flow Statement"

Financial Ratio

Financial Ratio have 2 functions:

  1) transfer financial data in financial reports into ratio which can provide valuable information to us about the company.
  2) allow financial data of a company becomes comparable with other company. 

Financial Ratio basically can be divided into 5 sections based on functions:
  1) ACTIVITY RATIO : To measure efficiency of a company perform its daily main operations.
  2) LIQUIDITY RATIO : To evaluate whether a company will be able to pay its short term debts and interests.
  3) SOLVENCY RATIO : To evaluate whether a company can pay its long term debts.
  4) PROFITABILITY RATIO : To measure how much profit that a company can generate from its resources.
  5) VALUATION RATIO : To measure stock price of a company whether undervalues/overvalues relative to its financial performance.

Further Information for: 

"ACTIVITY RATIO"

"LIQUIDITY RATIO"

"SOLVENCY RATIO"

"PROFITABILITY RATIO"

"VALUATION RATIO" 

Activity Ratio

ACTIVITY RATIO : To measure efficiency of a company perform its daily main operations.

Examples of Activity Ratio

  1) INVENTORY TURNOVER

INVENTORY TURNOVER = COST OF GOODS SOLD / AVERAGE INVENTORY 

To measure how fast inventory being cleared compared to cost of goods sold.

   

  2) DAYS OF INVENTORY ON HAND

DAYS OF INVENTORY ON HAND = 365 / INVENTORY TURNOVER 

To measure how many days need to clear inventory.

  3)  RECEIVABLES TURNOVER

RECEIVABLES TURNOVER = REVENUE / AVERAGE RECEIVABLES 

To measure how fast to receive money from customers compared to revenue.

  4)  DAYS OF SALES OUTSTANDING

DAYS OF SALES OUTSTANDING = 365 / RECEIVABLES TURNOVER 

To measure how many days need to receive cash from customers.

  5) PAYABLE TURNOVER

PAYABLE TURNOVER = PURCHASES / AVERAGE TRADE PAYABLE 

To measure how fast company pays money to suppliers.

  6) NUMBER OF DAYS OF PAYABLE 

NUMBER OF DAYS OF PAYABLE = 365 / PAYABLE TURNOVER 

To measure how many days company pays money to supplier.

  7)  WORKING CAPITAL TURNOVER

WORKING CAPITAL TURNOVER = REVENUE / AVERAGE WORKING CAPITAL 

To measure how efficient company use working capital to generate revenue.

  8)  TOTAL ASSETS TURNOVER

TOTAL ASSETS TURNOVER = REVENUE / AVERAGE TOTAL ASSETS 

To measure how efficient company use total assets to generate revenue.

Further Info: 

"LIQUIDITY RATIO"

"SOLVENCY RATIO"

"PROFITABILITY RATIO"

"VALUATION RATIO" 

Liquidity Ratio

LIQUIDITY RATIO : To evaluate whether a company will be able to pay its short term debts and interests.

Examples of Liquidity Ratio: 
  1)  CURRENT RATIO

CURRENT RATIO = CURRENT ASSET / CURRENT LIABILITY
To determine there are enough current asset to pay off current liability.

  2) QUICK RATIO

QUICK RATIO = (CASH + SHORT TERM MARKETABLE SECURITY + RECEIVABLES) / CURRENT LIABILITY
More conservative compared to CURRENT RATIO because inventory and prepaid expense which hard to liquidate are neglected.

  3)  CASH RATIO

CASH RATIO = (CASH + SHORT TERM MARKETABLE SECURITY ) / CURRENT LIABILITY
The most conservative method since only CASH and SHORT TERM MARKETABLE SECURITY that can fully liquidate to its fair value in short time.

  4) DEFENSIVE INTERVAL RATIO

DEFENSIVE INTERVAL RATIO = (CASH + SHORT TERM MARKETABLE SECURITY ) / DAILY EXPENDITURE
To evaluate new or highly dangerous company how many days the company can survive only based on its cash.

  5)  CASH CONVERSION CYCLE

CASH CONVERSION CYCLE = DAYS OF INVENTORY ON HAND + DAYS OF SALES OUTSTANDING - NUMBER OF DAYS OF PAYABLE
To calculate number of days between cash paid to suppliers and cash received from customers.

Other Info: 

"ACTIVITY RATIO"

"SOLVENCY RATIO"

"PROFITABILITY RATIO"

"VALUATION RATIO" 

  
 

Solvency Ratio

SOLVENCY RATIO : To evaluate whether a company can pay its long term debts.

Examples of Solvency Ratio: 
  1)  DEBT-TO-ASSET-RATIO

DEBT-TO-ASSET-RATIO = TOTAL DEBT / TOTAL ASSET
To measure the percentages of asset financed by debt.

  2)  DEBT-TO-EQUITY-RATIO

DEBT-TO-EQUITY-RATIO = TOTAL DEBT / TOTAL SHAREHOLDERS' EQUITY
To measure proportions of capital that are financed by debt and equity.

  3) FINANCIAL LEVERAGE RATIO

FINANCIAL LEVERAGE RATIO = TOTAL ASSET / TOTAL EQUITY  
To measure the amount of assets that can be created by one unit of equity. Higher financial leverage ratio means company uses more financial leverage such as debt and borrowing to finance its assets.

  4) INTEREST COVERAGE

INTEREST COVERAGE = EARNING BEFORE INTEREST & TAX / INTEREST PAYMENT
To determine whether the profit earned by company enough or not to pay off interest from borrowing.

Other Info:  

"ACTIVITY RATIO"

"LIQUIDITY RATIO"

"PROFITABILITY RATIO"

"VALUATION RATIO" 

Profitability Ratio

PROFITABILITY RATIO : To measure how much profit that a company can generate from its resources.

Examples of Profitability Ratio : 
  1)  NET PROFIT MARGIN

NET PROFIT MARGIN = NET PROFIT / REVENUE
To evaluate from 1 unit revenue, company can earn how much profit. Higher profit margin than peer companies shows that company very efficient in manage cost and maintain the lowest waste.

  2) PRETAX MARGIN

PRETAX MARGIN = EARNING BEFORE TAX / REVENUE
Since tax rebate will affect the true net profit , pretax margin employs earning before tax instead of net profit.

  3)  OPERATING PROFIT MARGIN

OPERATING PROFIT MARGIN = OPERATING PROFIT / REVENUE
To eradicate the effect of one-time profit earned through selling financial securities, operating profit is used.

  4)  GROSS PROFIT MARGIN

GROSS PROFIT MARGIN = GROSS PROFIT / REVENUE
To investigate minimum percentage of profit that can be earned because gross profit only involve the crucial expenses that need to produce revenue. 

  5)  RETURN ON ASSET

RETURN ON ASSET = NET PROFIT / TOTAL ASSET
To evaluate efficiency of a company using their assets to generate income.

  6)  RETURN ON EQUITY

RETURN ON EQUITY = NET PROFIT / TOTAL EQUITY
To evaluate the rate of return that provided to shareholders who invest capital into the company.

Other Info: 

"ACTIVITY RATIO"

"LIQUIDITY RATIO"

"SOLVENCY RATIO"

"VALUATION RATIO"